Privatising PSBs not desirable

 

Privatising PSBs is no solution

As part of her budget speech, Hon'ble Finance Minister Smt. Nirmala Sitharaman announced in the Parliament that two public sector banks (PSBs) and one public sector general insurer will be privatised during FY 2021-22. Later on when she was interviewed in one of the news channels, she said there was a sentiment around public sector banks that they could not be "touched", but the country needs efficient banks for the economy to take the next step and return to the growth path.

Two weeks back, Finance Secretary Shri T.V.Somanathan said that as per the stated policy of the government, (which recommends that the government should cap its holding to less than 40 per cent), most of the public sector banks will be eventually privatised. Simultaneously, there is a working committee report lying with RBI, which recommends that banking licence can be given to large corporate houses subject to compliance of certain conditions. So the intents are clear. To privatise PSBs slowly with a definite plan. 

The question is whether the country and its citizens reached a stage, where it can do without PSBs? One needs to remember the conditions that were prevalent in the economy that led to gradual nationalisation of major banks in India. (Imperial Bank as SBI in 1955, Princeley state banks as subsidiaries of SBI in 1959/1960, 14 major private banks in 1969 and another 6 banks in 1980). Successive governments faced a situation that the five year plans were not translated into growth for India as a whole and there was clear imbalance in the growth between metroplitan/major urban centres and other urban centres/semi urban and rural areas. The savings of the public deposited in private banks were pooled and lent to a few elite, a major slice went to  the owners of these banks running other businesses. Nationalisation was thought as the only way to convert ‘class banking’ into ‘mass banking’ and spread access of banking and credit to all geographies within the country.

Let me briefly touch upon how PSBs have contributed in the efforts of nation building by the government, the core objective behind nationalisation of banks, in the last 50 years

—  Access to Banking: Banking at door step is now a reality across nation including rural and semi urban areas. From less than 9000 branches in 1969, the SCBs have more than 160,000 branches now. In addition, 220,000 ATMs, 5.41 lac BCS in rural areas, 6.35 lac BCs in urban areas are assisting the public in carrying out their banking transactions. A majority of the above network, with particular reference to semi urban and rural areas, belong to the PSBs.

—  Agriculture: From a few thousand cr. In 1969, the agriculture finance has reached a level of Rs.12 lac cr. of which Rs.7 lac cr. is extended as Kisan Credit Cards (KCC) to finance crop loans.  The nation achieved Green Revolution, self-sufficiency in food grain production and also holds the record for rearing the largest cattle population in the world. The PSBs account for bulk of the lending extended to agriculturists.

   Rural lending: As per RBI report, areas with a population of less than 10,000 account for 8-9% of the total bank credit and more than 90% of the credit needs of these areas are met by PSBs only

—  MSME: Over 60% of lending (Rs.9 lac cr.) are from PSBs. Majority of the Rs.15 lac cr. loans extended to 28 cr. beneficiaries under Mudra Scheme were disbursed by the PSBs.

—  Infrastructure: India realized in the year 2000, the need for improving essential infrastructure facilities like power, road, ports, to develop the economy as a whole. Since the development finance institutions at that time, ICICI and IDBI, converted themselves into Universal Banks in order to enable them to access demand deposits from public, the mantle to lend infrastructure fell on the PSBs. The infra loan portfolio which was Rs.7243 cr. in 1999-2000 increased to Rs.786045 cr. in 2012-13. (compounded annual growth rate of 43.4%over a period of 13 years). The portfolio stands at Rs.11 lac cr. today. While the PSBs helped India to realise its business potential through availability of power, construction of roads, ports, harbours, etc. significant amount of infra loans turned into impaired assets, which impacted their profitability to the extent of making the banks unviable. The loans given to the power sector still remain a grey area in the books of PSBs.

—  Capital Formation: The growth story of India belong to retail savers who have contributed in no small measure thanks to the access to banking facilities near home. From a deposit level of Rs.5900 cr. in 1971, it reached Rs.160 lac cr. as on 31.03.2021.  This enabled the banking system to improve its loans position from a level of Rs.4700 cr. in 1971 to Rs.108 lac cr as on 31.03.2021. As on date, PSBs hold a healthy share of more than 60 percent of the above businesses.

—  Financial Inclusion: PMJDY, the flagship scheme of the present government was a runaway success.  Over 41 cr. bank accounts were opened in the last five years. PSBs and RRBs, sponsored by PSBs, account for 97% of the new PMJDY accounts. Direct benefit transfer (DBT) schemes of the government like direct credit to farmers' accounts, Pradhan Mantri Garib Kalyan Yojana, etc. owe their success to PSBs, which enabled opening and maintenance of these accounts by the beneficiaries without any hassle.

—  Demonetisation: PSBs played a major role in collecting, exchanging Rs.15.33 lac cr. worth of money deposited by the general public, when the government announced demonetization of Rs.500, Rs.1000 notes. Again it is only the PSB ATMs that came to the rescue of the public, to with draw money, for meeting their daily cash requirements.

—  Pandemic Times: The role of a banker, especially a PSB banker, as a warrior in assisting the business and individuals for their cash, banking needs and loan requirements is acknowledged by everyone including the Hon’ble FM. Certain schemes like collateral free Rs.4.5 lac cr ECLGS, Rs.10,000 cr. lending to street vendors, Rs.2 lac cr. additional KCC loans to 2 lac farmers, creation of Rs.1 lac cr. fund for Agri. Infra were announced with an awareness that PSBs will be the implementers to ensure the success of such schemes.

Issues in Privatisation:

A. Fulfillment of Social Objectives:  Unless the government is of the opinion that the nation building measures, some of which are enumerated above, are fully achieved or of no relevance today, the move to privatize PSBs might reverse the gear of national development. Even today, nearly 40 percent of the lending to agriculture is in the hands of money lenders, lacs of micro enterprises are without any formal bank credit, millions of people do not have bank accounts and social security schemes like insurance, pension are  yet to reach a majority of the population. One may argue that the PSBs have laid the foundation on the nation building exercise and private sector banks (pvbs) will assist the government to attain its national objectives from now on. But the new generation pvbs, which commenced their business since 1993, after start of liberal reforms, do not give the confidence that they will compromise on their profitability motives to build the nation.  Let me give some examples of their concentration in the areas of priority sector lending (PSL) defined by the government and the regulator (RBI)

1.     Agriculture: Most of the pvbs achieve their target of PSL under agriculture through priority sector lending certificates (PSLC), sold by PSBs/RRBs, which have achieved in excess of their targets.  The areas where they lent appear to be towards self help group (SHG), joint liability group (JLG) and micro financing where the rate of return is above 15 per cent. Crop loans, which is the mainstay of agriculture, are lent to a major extent by PSBs only. The new small finance banks (SFBs) are no exception.

2.     MSMEs: Concentration of pvbs is on collateralized lending and where the rate of return is in the range of 12-15%

3.     Education Loans: Very limited exposure and that too on loans above Rs.7.5 lacs, which are well secured.

4.  Financial Inclusion: Since majority of the accounts opened are for availing the benefit of DBT, sufficient float funds may not be available by maintaining such accounts. Pvbs may not show interest in opening/maintaining such accounts without being compensated through fees, etc. 

5.     Rural/Semi Urban Branches/ATMs: Pvbs are not present in a big way.

So privatization is likely to derail nation building exercise and even access to banking might be a paid affair for the weaker section and poor, which enjoy banking facilities relatively free of cost. The existing network of PSBs in rural/semi urban areas might be reduced in the name of rationalisation.

B. Assured Effficiency and Profitability:

Right from the former governor and deputy governor of RBI, every one advocates that PSBs will turnaround much more efficiently, if they are privatised. One do not get the confidence, if the history is any indicator. 

1. Global Trust Bank, failed in its first attempt to merge with UTI Bank, was merged with Oriental Bank of Commerce, an efficient PSB at that time, in 2000

2. Times Bank, a new generation private bank after reforms, was merged with HDFC Bank in 2000.

3. Yes Bank had to be rescued by investment into equity by select banks, with SBI leading the pack with an investment of 49%

4. PMC Bank was placed under moratorium 

5. Shadow Banks or NBFCs to be precise IL&FS and DHFL were taken to NCLT by the government/regulator for resolution.

Failure in all the above banks/NBFCs are due to reasons of corporate governance related issues, exposing the depositors/creditors to grieve, if the remedial measures were not in place immediately. In addition, there were serious corporate governance issues in the second largest pvb, ICICI Bank involving alleged conflict of interest in sanction of loans to a big corporate.

Way Forward: Value of a stock is derived not only by its dividend or profit earned but on its book value and its ability to multiply the book value in future. PSBs value should take into account the billions of assets created in the society and the crores of citizens, whose livelihood has prospered in the last five decades. The country and the common man need PSBs. Instead of privatising, the government can do the following:

1. As per amendment made to Banking Regulation Act, the government share holding in a PSB should not be less than 51 per cent. 

SEBI guidelines states that the promoter should not hold more than 75% in a listed entity. The government holds between 80 to 97 per cent in most of the PSBs. Only in three banks, the govt share holding is less than 75 per cent. 

As a first step, the government should identify the strong banks and start disinvesting to keep its shareholding to less than 75 per cent, which also complies with its holding as per BR act. After achieving this, it can take the next step of diluting it still further and keep its shareholding between 51 and 66 percent. Ideally 66% shareholding will ensure uninterrupted implementation of national objectives.

The above actions will enable the government not only achieve its disinvestment targets, but also improve corporate governance standards as the board will have reputed representatives from among the public shareholders in the board.

V. Viswanathan 

28th July 2021

The contents are in line with the first part of my speech delivered in the AIBEA Webinar on 20th July 2021 under the topic 'Is profitability the lone criteria to judge a PSB'